1. 1 Corporate Governance Reform: Regional Cooperation Prof Stephen Y L Cheung City University of Hong Kong

2. 2 Contents Why it is important? What has been done? What next?

3. 3 Regional Effects The ‘Guidelines for Good Corporate Governance Practice’ prepared by the PECC, endorsed by APEC ministerial meeting Scorecard for listed companies –Thailand –Hong Kong –China –The Philippines

4. 4 Research Methodologies I Survey results based on publicly available information Hang Seng Index (HSI), Hang Seng Hong Kong Composite Index (HSHKCI), Hang Seng China- Affiliated Corporations Index (HSCCI) and Hang Seng China Enterprises Index (HSCEI) constituent stocks Based on information disclosed in 2002 168 major companies are covered

5. 5 Research Methodologies II Avoids subjectivity bias Not dependent on companies’ willingness However, not as rich as an internal assessment...... and captures only what the companies released in public and their documentation Written request was sent to individual companies. Only a few companies supplied us with information

6. 6 Objectives of Corporate Scorecard for Hong Kong Listed Companies Encourage adoption of best practice of corporate governance in Hong Kong through a systematic evaluation of current practices Define a methodology/ framework to assess corporate governance practices in Hong Kong Develop specific criteria and a measurement tool to evaluate individual companies Set up processes to evaluate corporate governance of Hong Kong companies on an annual basis Hopefully

7. 7 Consistency Each company was rated by two different members The overall results were cross-checked by academics

8. 8 Scorecard Followed The Five OECD Corporate Governance Principle OECD principle Number of questions & sub-questions A.Rights of shareholders 16 B.Equity of shareholders 10 C.Role of stakeholders 4 D.Disclosure and transparency 30 E.Board responsibilities 26 86 OECD is internationally recognized HKEx guidelines comprehensively covered 168 public companies surveyed

9. 9 Positive Correlation between Good Corporate Governance and Company Valuation

10. 10 Market Valuation (Tobin’s Q) by Corporate Governance Entry Quartile

11. 11 Corporate Governance Performance by Indices HSI ( 恒生指數 ) HSHKCI ( 恒生香港綜合指數 ) HSCEI ( 恒生中國企業指數 ) HSCCI ( 恒生香港中資企業指數 ) Weak Strong

12. 12 Corporate Governance Performance by Industries Weak Strong

13. 13 Corporate Governance Performance by Categories Weak Strong A: Rights of Shareholders ( 股東的權利 ) B: Equitable Treatment of Shareholders ( 對股東的公平待遇 ) C: Role of Stakeholders in Corporate Governance ( 利益關係團體在公司治理中扮演的角色 ) D: Disclosure and Transparency ( 公開與透明化 ) E: Board Responsibilities ( 董事會的責任 )

14. 14 A.Rights of Shareholders ( 股東的權利 ) Improvements: Improve the quality of Notice to Call Shareholders Meeting Attendance of all Board members AGM minute –any Q&A sessions? –any resolutions being solved? 84.49 27.79

15. 15 A.Rights of Shareholders (388) ( 股東的權利 )

16. 16 B. Equitable Treatment of Shareholders ( 對股東的公平待遇 ) Improvements: Provide rationale/ explanation for related-party transactions Allow minority shareholders to influence the Board To facilitate voting by proxy 93.33 63.33

17. 17 B. Equitable Treatment of Shareholders (762) ( 對股東的公平待遇 )

18. 18 C. Role of Stakeholders in Corporate Governance ( 利益關係團體在公司治理中扮演的角色 ) Improvements: Disclose more details on the safety and welfare of its employees Long-term employee incentive plan 100 41.67

19. 19 C. Role of Stakeholders in Corporate Governance (2388) ( 利益關係團體在公司治理中扮演的角色 )

20. 20 D. Disclosure and Transparency ( 公開與透明化 ) Improvements: Transparency in ownership structure Quality of Annual Report –Basis of Board members’ remuneration –Operating risks Communication with shareholders –Website’s contents 90.33 64.01

21. 21 D. Disclosure and Transparency (45) ( 公開與透明化 )

22. 22 E. Board Responsibilities ( 董事會的責任 ) Improvements: A set of written corporate governance rules Corporate vision/mission The quality of the Audit Committee Report in the Annual Report –Attendance –Internal control –Management control, etc. 81.67 41.67

23. 23 E. Board Responsibilities (2) ( 董事會的責任 )

24. 24 Results NOT finger-pointing exercise Important input for policy-makers, companies, and the public Score for individual companies will not make public Feedback report can be obtained for individual companies

25. 25 The Top 10 Best Performing Companies (by alphabetical order) Asia Satellite (1135) Bank of East Asia (23) China Mobile (941) CLP Holdings (2) HK & S Hotels (45) HKEx (388) HSBC Holdings (5) Linmark Group (915) MTR Corporation (66) Vtech Holdings (303)

26. AllHSIHSHKCIHSCCIHSCEI Market ValueMean20,395.8788,227.8727,870.7725,754.783,920.87 (in million HK$)S.D.76,356.70156,370.0290,962.8980,826.035,899.57 ROAMean0.040.070.040.05 S.D.0.100.070.120.100.04 Ln(TA)Mean16.1817.8816.1616.0416.63 S.D.1.661.581.851.261.19 CurrentMean2.051.612.111.892.03 S.D.1.680.951.471.062.39 D/EMean1.391.921.610.980.79 S.D.2.233.592.610.690.79 No. of firms with the committee Dummy CEO & Chairman56.0013.0043.008.00 Dummy Audit committee134.0030.0099.0024.0017.00 Dummy Compensation38.0012.0030.004.008.00 Dummy ADR91.0028.0063.0011.0022.00 Dummy MSCI36.0022.0036.00-- Dummy H Share & Red Chips58.006.00 27.0031.00 The Characteristics of Our Sample Companies

27. OLS Results for CGI with Control Variables MTBV (1)(2)(3)(4)(5) CGI0.0330**0.0428**0.0475***0.0356**0.0337** ROA2.5282**3.0430***3.0431***2.2866** Ln(TA)-0.3081***-0.2043**-0.2209**-0.3583*** Current-0.042-0.0317-0.02090.0098 D/E-0.0441-0.01900.03470.1423 BOUT-0.0249-0.0070-0.0193 BEXC-0.1089***-0.0941**-0.0622 Top5-0.0128***-0.0126***-0.0011 Dummy CEO & Chairman0.18370.1738 Dummy Audit committee0.13530.2321 Dummy Compensation0.27940.3000 Dummy ADR-0.1421 Dummy MSCI1.4939*** Dummy H Share & Red Chips0.3374

28. OLS Results for Transparency Index with Control Variables MTBV (1)(2)(3)(4) TINDEX0.0371**0.0414**0.0373**0.0388*** NONTINDEX0.0179*0.0202**0.01360.0108 ROA2.3482**2.8850***2.8973***2.1137** Ln(TA)-0.3414***-0.2419***-0.2540**-0.3850*** Current-0.0575-0.0496-0.0416-0.0108 D/E-0.0589-0.03190.01640.1205 BOUT-0.0277-0.0106-0.0267 BEXC-0.1046***-0.0902**-0.0558 Top5-0.0140***-0.0138***-0.0017 Dummy CEO & Chairman0.20840.1935 Dummy Audit committee0.16420.2637 Dummy Compensation0.19970.2254 Dummy ADR-0.1382 Dummy MSCI1.4847*** Dummy H Share & Red Chips0.2346

29. 29 Result (I) Corporate governance does matter –Positively and significantly related to the market value Number of executive directors have negative impact The top 5 shareholders’ holding have negative impact The inclusion in the MSCI have positive impact

30. 30 Result (II) Transparency and non-transparency indices – Transparency index does matter –Non-transparency index become insignificant when the number of executive director and top 5 shareholder’s share holding add into the model

31. 31 Concluding Remarks Similar results are found in Thailand Comparison among different markets

32. 32 ~ END ~